Despite healthy revenue growth, Dr Reddy’s’ operating margin during the March quarter was impacted by pricing pressure in key markets. Heightened competition in key products such as metoprolol in the US led to a squeeze in the gross margins.
Higher wage costs and integration of its recently acquired Netherlands-based specialty pharma company – Octopus, further added to the margin pressure. Adjusting for the one-time settlement income of $22.5 million received from Nordion in lieu of the damages suffered by the company, operating margins slipped 1.9 percentage points to 23 per cent.
The company wrote down Rs 104 crore of impairment loss on intangibles during the same quarter last year. Adjusting for this, net profit grew 28 per cent for the quarter.
Key challenge
Healthy growth in the US, Russia and active pharma ingredient business helped the 26 per cent growth in Dr Reddy’s revenues. The 31 per cent growth in the US was driven by exclusive launch of generic propecia, used to treat prostrate enlargement.
The company has 65 product filings pending approval in the US market. Dr Reddy’s has increased its R&D spend by one percentage point to seven per cent of total revenues in 2012-13. This is due to a conscious change in the company’s strategy to focus on niche products with limited competition. But longer approval time-line for new products and competition in the oral dosage forms may be the key challenge to growth in the US market.
Growth in the company’s India business slowed to 8.7 per cent last quarter after clocking double-digit growth for five consecutive quarters. While this is largely in line with the sluggishness in the overall market, the outcome of the company’s efforts to step up growth such as realigning sales force and increasing promotion remains to be seen.
Even as the management is confident of growth pick up in India, the proposed new drug pricing policy, if implemented, may challenge growth sustainability in the interim period.
Even as Dr Reddy’s European business continued to falter, the active ingredient business continued healthy growth during the quarter. The segment’s revenues rose 36 per cent during the quarter, continuing on the growth path for the ninth successive quarter.